IDEAS home Printed from https://ideas.repec.org/p/sce/scecf1/184.html
   My bibliography  Save this paper

On Inflation and the Persistence of shocks to Output

Author

Listed:
  • Maral Kichian and Richard Luger, Bank of Canada

Abstract

The purpose of this paper is to examine whether the level of inflation matters for the persistence of output growth when shocks to output have asymmetric effects. The idea that inflation could have such threshold effects is worth investigating because some authors have suggested that a low inflation environment was instrumental in generating the unprecedented strong and sustained output growth rates recently witnessed in some countries. In a separate literature the debate has been ongoing with respect to whether shocks to output growth have asymmetric effects on its persistence. For example, Beaudry and Koop (1993) have shown that, by including an index variable that captures the depth of recessions in a standard ARMA model, positive shocks yield a substantially different effect on output dynamics than negative ones. On the other hand, using unobserved-component models with a threshold variable, Elwood (1998) finds that these two types of shocks do not lead to significantly different estimates of output growth persistence. This discrepancy in results may lie in the fact that these models are not general enough. Thus, a good strategy would be to combine elements from both studies and to use a more flexible modeling framework to examine this asymmetry question. In this paper we generalize the Elwood (1998) model by extending it to an ARMA setting while allowing for multiple threshold effects. Using Canadian data we then test for inflation threshold effects on output growth dynamics, as well as for asymmetric impacts of output shocks. The dynamics parameters are therefore assumed to change depending on 1) whether lagged disturbances are positive or negative, and 2) on whether inflation is above or below some estimated threshold level. The estimation is carried out using maximum likelihood and Kalman filtering while hypotheses are tested via the application of tests developed by Hansen (1996) for when a nuisance parameter is present only under the alternative. Our first result concurs with that of Beaudry and Koop and shows that positive shocks indeed lead to a significantly higher output growth persistence than do negative shocks. In addition we find that, with positive shocks, the asymmetry is more marked when inflation is above its threshold value; that is, while negative shocks display a similar persistence, positive shocks to output are more persistent when inflation is in the low regime than when it is in the high one. Therefore, low inflation can be associated with a healthier output growth dynamics compared to an environment of high inflation. Finally, we find the interesting result that the estimated threshold value for Canada is approximately 4%, which is one per cent higher than the upper limit of the Bank of Canada announced inflation target bands for the post-1996 period.

Suggested Citation

  • Maral Kichian and Richard Luger, Bank of Canada, 2001. "On Inflation and the Persistence of shocks to Output," Computing in Economics and Finance 2001 184, Society for Computational Economics.
  • Handle: RePEc:sce:scecf1:184
    as

    Download full text from publisher

    To our knowledge, this item is not available for download. To find whether it is available, there are three options:
    1. Check below whether another version of this item is available online.
    2. Check on the provider's web page whether it is in fact available.
    3. Perform a search for a similarly titled item that would be available.

    Other versions of this item:

    References listed on IDEAS

    as
    1. Beaudry, Paul & Koop, Gary, 1993. "Do recessions permanently change output?," Journal of Monetary Economics, Elsevier, vol. 31(2), pages 149-163, April.
    2. John Y. Campbell & N. Gregory Mankiw, 1987. "Are Output Fluctuations Transitory?," The Quarterly Journal of Economics, Oxford University Press, vol. 102(4), pages 857-880.
    3. Hansen, Bruce E, 1996. "Inference When a Nuisance Parameter Is Not Identified under the Null Hypothesis," Econometrica, Econometric Society, vol. 64(2), pages 413-430, March.
    4. Potter, Simon M, 1995. "A Nonlinear Approach to US GNP," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 10(2), pages 109-125, April-Jun.
    5. Peter K. Clark, 1987. "The Cyclical Component of U. S. Economic Activity," The Quarterly Journal of Economics, Oxford University Press, vol. 102(4), pages 797-814.
    6. John B. Taylor, 1998. "Monetary policy and the long boom," Review, Federal Reserve Bank of St. Louis, issue Nov, pages 3-12.
    7. Elwood, S. Kirk, 1998. "Is the persistence of shocks to output asymmetric?," Journal of Monetary Economics, Elsevier, vol. 41(2), pages 411-426, April.
    8. Andrews, Donald W K, 1993. "Tests for Parameter Instability and Structural Change with Unknown Change Point," Econometrica, Econometric Society, vol. 61(4), pages 821-856, July.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    Threshold; Asymmetry; Persistence; Output Growth;

    JEL classification:

    • E0 - Macroeconomics and Monetary Economics - - General
    • C5 - Mathematical and Quantitative Methods - - Econometric Modeling
    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:sce:scecf1:184. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Christopher F. Baum). General contact details of provider: http://edirc.repec.org/data/sceeeea.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.